What is the term of mutual trust and confidence and how is it applied?

The term of mutual trust and confidence is a term that "an employer must not, without reasonable or proper cause, conduct itself in a manner calculated or likely to destroy or seriously damage the relationship of trust and confidence between the employer and the employee."

While the term has been recognised in Australian trial and appellate courts, the High Court is yet to make a definitive ruling on its existence, scope and operation. Lower courts have limited the application of mutual trust and confidence in two ways:

first, mutual trust and confidence will not be implied if an employee has access to statutory unfair dismissal laws or statutory mechanisms to pursue their grievances (applied in Johnson v Unisys Ltd [2003] 1 AC 518 and South Australia v McDonald (2009) 104 SASR 344 – theJohnson Rule); and

second, where it is implied and a breach occurs, damages cannot be awarded because of distress or financial loss resulting from the manner of the dismissal itself (applied in Addis v Gramophone Co Ltd [1909] AC 488 – the Addis Rule).

What happened in Shaw?

In Shaw, two teachers were dismissed by the NSW Director-General of Education during their probationary periods. They filed a claim in the NSW District Court alleging that mutual trust and confidence was breached:

by failing to give reasonable notice of material that was critical of their conduct;

by failing to provide adequate counselling and support;

by distressing and humiliating them;

by failing to provide procedural fairness during their dismissal; and

by providing adverse references when requested by subsequent potential employers.

At an interlocutory hearing, District Court Judge Elkaim struck out the teachers' claim based on mutual trust and confidence. He held that both the Johnson Rule and Addis Rule meant there was no possibility of finding the term within their particular contracts.

The teachers appealed to the NSW Supreme Court of Appeal. The Court of Appeal had to consider whether the strike-out was justified, or, in other words, whether the teachers' claim of a breach of trust and confidence should be heard.

The Court of Appeal took the unusual step of convening a five-judge panel to decide the question. Because the judgment was a 5-0 result, it is a significant decision on how mutual trust and confidence is implied into Australian employment contracts.

What did the NSW Court of Appeal decide?

The Court of Appeal overturned Judge Elkaim's decision and reinstated the mutual trust and confidence claim. Importantly, the teachers' claim was of "triable quality" because they were probationary employees. The statutory scheme that governed their employment (the Teaching Service Act 1980) provided no ability for probationary employees to challenge their dismissal. It was therefore arguable that the Johnson Rule had no application.

In considering the Addis rule, the Court of Appeal reviewed its application across the common law world and found that it had been significantly curtailed and qualified in many instances. The Court of Appeal concluded that there was no absolute rule precluding damages as a result of a breach of trust and confidence:

"In summary, there is no authority of the High Court or an intermediate appeal court in Australia that will unquestionably compel dismissal of the claim for damages… the significant qualifications upon [the Addis rule] will leave room for the appellants' claim to be addressed. There is a cogent basis for arguing that damages for breach of contract may be awarded…I consider to be remote the possibility that [breach of trust and confidence] cannot ever sound in damages."

If the term is able to result in damages, what are the implications?

Shaw confirms the view that mutual trust and confidence can be implied into Australian employment contracts, particularly where there is no access to unfair dismissal legislation or the like (eg. executive, probationary and casual contracts).

Accordingly, when dealing with treatment, management, counselling and termination of senior staff and executives, the manner in which this occurs could potentially lead to claims of breach of the implied term and expose the employer to damages for breach of contract.

In the United Kingdom, the following types of breaches of trust and confidence have resulted in damages being awarded to employees:

exercising a contractual right to relocate employees in a capricious manner.

What should you do?

Following Shaw, all employers should assume the duty of mutual trust and confidence applies and can result in damages.

Employers need to ensure fair and proper treatment in managing and dealing with senior executives, particularly in relation to investigations, counselling and events leading to termination of the executive's employment.

Employers should seek advice, and be adequately trained, when managing performance and misconduct so as to limit a potential claim based upon the term.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.